Sepracor (SEPR) Q4 Earnings Preview

Secondary plays: GSK, SNY, CRTX, PRX, MYL, WPI...

SEPR is expected to report Q4 earnings tomorrow before the mkt opens followed by a conference call at 8:30am ET (was delayed from 2/5 due to potential restatements for periods back to 2002)...

SEPR Consensus: First Call consensus is Q4 EPS of $0.53 on revs of $341.78 mln; Q1 EPS of $0.57 on revs of $324.27 mln; FY07 EPS of $1.44 on revs of $1.24 bln; FY08 EPS of $2.28 on revs of $1.34 bln...

Guidance: Co reaffirmed guidance at JPMorgan Healthcare conference on 1/9, co sees FY07 EPS of $1.33-1.43 (excluding $0.28 charge and including restructuring costs, may not be comparable to $1.46 First Call consensus) on revs $1.23-1.30 bln vs $1.24 bln First Call consensus. Co also reaffirmed FY08 EPS guidance of $2.35-2.45 vs $2.32 First Call consensus. Stock is trading down ~18% since reaffirming this guidance...

Expectations: Since 2000, co has beaten earnings estimates 26 times (missed only 4 times) and beat Q4 estimates for past 4 years by at least $0.21. Revs growth YoY for Q4 has been >14.8% for past 8 years, but growth has slowed over the past year (revs growth actually declined last qtr -1.9%). For the most part, slower Rx trends have dampened Q4 and 2008 expectations, but estimates still remain plausible with new deals in the pipeline (such as Ciclesonide franchise deal with Nycomed and Bial collaboration)...

As for particular drug numbers, Q4 estimates (based on single analyst estimates) are Lunesta $160 mln ($612 mln for the year), Xopenex/XopenexHFA $185 mln ($587 for the year) and Brovana $12 mln. In July, co stated on call it expects FY07 Lunesta sales of $595-615 mln and Xopenex sales of $495-515 mln...

Areas of Focus:
1) Drug numbers (especially Lunesta sales guidance, which accounts for ~50% revs)
2) FY08 outlook (co usually gives more detailed guidance on call)
3) Update on recently announced Nycomed agreement
4) Update on recently announced (1/28) internal review of government price reporting (co also disclosed statements for periods back to 2002 should no longer be relied upon)
5) competition such as market risk for Lunesta as Ambian goes generic and NBIX's Indiplon
6) takeover speculation that JNJ may place bid...

Briefing note: Short interest is 7%, mkt cap is $2.58 bln, float is 110.31 mln and avg volume is 2 mln...

Recent price movement: Since reporting last qtr, stock is trading down ~15% and is still barely trading off its 52 week lows (~$22.25)... The stock has made some notable moves after releasing earnings/guidance in the past. Last qtr the co gapped up ~14% after reporting (beat by $0.11 and issued mixed guidance) and on 7/27 the stock traded down ~25% after co missed estimates by $0.31 and revised guidance on conference call (in significant part due to the CMS changes on Xopenex inhalation solutions)...

Options volatility: Recently, SEPR Mar 25 calls have seen interest, pushing implied vol up to ~63%. Based on its options volatility, implied volatility is up ~54% vs its historical volatility (over 30 day period).